## The Bahamas: Staff Concluding Statement of the 2019 Article IV Mission

_IMF News, April 15, 2019_

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## Bibliographic details
- Published: April 15, 2019

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### Recent Performance and Outlook
- Real GDP grew by 2.3 percent in 2018.
- Growth is projected at 2.1 percent in 2019, underpinned by continued tourism sector growth.
- Unemployment: positive jobs growth noted, but the unemployment rate remains high and is projected to decline only gradually.
- Inflation averaged 2.2 percent in 2018 and is projected to fall to 1.6 percent in 2019 as the temporary effect of the VAT rate increase fades.
- Medium-term growth is projected to converge to potential of 1½ percent as tourism growth normalizes.
- Key downside risks:
  - Significant slowdown in the U.S. and other advanced economies could adversely affect the tourism-dependent economy.
  - Reputational risks in the offshore sector despite strengthened regulatory and transparency standards.
  - High vulnerability to hurricanes and climate change.
- Policy implication: Continued commitment to fiscal responsibility and sound macro-financial policies is indispensable.

### Fiscal Reforms and Public Financial Management
- Fiscal Responsibility Law (FRL):
  - Effective implementation will bolster policy credibility and ensure durable gains from fiscal consolidation.
  - Commitment to maintaining the pace of fiscal adjustment in line with FRL targets aims to bring public debt towards the anchor of 50 percent of GDP.
- Fiscal outturns and near-term positions:
  - Fiscal deficit is projected to narrow to 2.1 percent of GDP, close to the 1.8 percent target for FY2018/19.
  - Weaker-than-expected revenue performance attributed to grace periods for revenue measures and legal disputes.
  - Recognition of sizeable arrears highlights need for stronger public financial management (PFM) systems.
- Recommended legislative and institutional priorities:
  - Enact the Public Financial Management, Public Debt Management, and Procurement Acts.
  - Operationalize the Fiscal Council to improve budgeting, transparency, and accountability.
- Expenditure policy:
  - Near-term need for expenditure restraint to deliver FY2018/19 target.
  - Government should further rein in current expenditures to safeguard public investment.
- Medium-term fiscal measures:
  - Decisive measures needed to reduce debt, including reforms in public pensions and health, while balancing inclusive growth and disaster preparedness.
- Tax policy:
  - The Bahamas does not levy income or capital gains taxes; revenues rely mostly on VAT, business license fees, and international trade taxes.
  - Recommendation: comprehensive review of the tax regime in light of global tax trends and prospective WTO accession to achieve a more equitable and less distortionary tax system.
  - Recommendation: quantitative review of existing tax and other investment incentives to strengthen transparency and inform policy.

### Boosting Resilience to Natural Disasters
- Financial preparedness actions taken:
  - Secured contingent credit line with the Inter-American Development Bank.
  - Re-subscribed to disaster insurance through the Caribbean Catastrophe Risk Insurance Facility (CCRIF).
  - Speedy establishment of the Natural Disaster Fund recommended to complement existing financial tools.
- Physical resilience:
  - Invest in physically resilient infrastructure, including building code enforcement and coastal management.

### Strengthening the Financial Sector
- Banking sector soundness:
  - 2019 FSAP found healthy profits and high capital and liquidity ratios.
  - Credit growth is hampered by non-performing loans (NPLs) and lack of information about potential borrowers.
- Key recommendations to improve banking sector performance:
  - Progress supervision of credit underwriting and timely resolution of NPLs.
  - Introduce a local real estate price index to improve visibility into the residential housing market and NPL valuations.
  - Operationalize the credit bureau to strengthen quality and pace of credit activity and improve assessment of lending standards.
- Resolution and governance:
  - Strengthen the central bank’s recovery and resolution powers to enhance banking sector resilience.
  - Complete planned legislative reform and enhance governance of public asset management companies following recapitalizations of the Bank of The Bahamas.
  - Strengthen governance arrangements for state-controlled financial institutions to ensure effective and independent supervision.
- International sector framework:
  - Implement new unified business licensing fee framework removing preferential tax treatment for non-resident entities.
  - Strengthen economic presence requirements for non-resident firms and entity transparency regarding beneficial ownership.
  - Monitor potential spillovers into the domestic financial system from unification of banking license regimes.
- Anti-money laundering / Countering financing of terrorism (AML/CFT):
  - FATF continues to identify The Bahamas as a country with strategic AML/CFT deficiencies.
  - Progress in improving technical compliance is welcome; further revision of laws, regulations, supervisory guidelines, and codes of conduct recommended.
  - Move focus to implementation to demonstrate effectiveness of the AML/CFT regime, including actions in line with the FATF Action Plan.

### Monetary Policy, Liquidity, and Financial Innovation
- Monetary stance and structural liquidity:
  - Accommodative monetary policy stance is appropriate given the cyclical position and the negative credit gap.
  - A large structural liquidity surplus exists due to exchange controls and absence of a well-developed domestic securities market.
- Policy recommendations:
  - Deepen domestic sovereign debt market through regular auctions.
  - Central Bank of The Bahamas (CBOB) should continue to reduce its holdings of government debt.
  - Adopt amendments to the CBOB law to strengthen governance and define limits on government lending.
- Digital finance and inclusion:
  - CBOB plans to pilot a digital central bank currency to boost financial inclusion.
  - New financial technologies can advance inclusion, but risks—especially to financial stability, cybersecurity, and AML/CFT—need careful assessment and safeguards reflected in project design.
  - Modernize payment systems and use proven technologies to expand geographic penetration of digital payments.

### External Accounts, Competitiveness, and Structural Reforms
- Current account and external sustainability:
  - Current account deficit increased to 15.9 percent of GDP in 2018, partly reflecting one-off factors related to Baha Mar completion and an overvalued real effective exchange rate.
  - Significant—albeit declining—current account deficits are projected to continue, financed mainly by foreign direct investment.
  - Policy implication: With strong commitment to the exchange rate peg, structural reforms to boost competitiveness alongside fiscal consolidation and accumulation of foreign exchange reserves are critical to strengthen external buffers.
- Structural reform priorities:
  - Address long-standing structural impediments to boost private investment and lower cost of doing business.
  - Priorities include lowering energy costs, improving private sector credit access, and tackling skills mismatches in the labor market.
  - Planned accession to the World Trade Organization (WTO) makes tackling remaining impediments more urgent.

### Statistics and Data
- Recent improvements:
  - Enhanced General Data Dissemination System and increased fiscal data reporting frequency noted as important steps.
- Recommendation:
  - Invest further in producing comprehensive and frequent information on national and external accounts, the labor market, and household surveys to enable better informed policy making and timely responses.

### Mission and Acknowledgements
- An IMF team visited Nassau from April 1-12, 2019 for the 2019 Article IV consultation.
- The team thanked Bahamian authorities, private sector interlocutors, and civil society representatives for candid and productive discussions.

*IMF staff concluding statement of the 2019 Article IV mission to The Bahamas (April 15, 2019).*

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## References

- [The Bahamas and the IMF](http://www.imf.org/external/country/BHS/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2019/04/13/mcs-the-bahamas-staff-concluding-statement-of-the-2019-article-iv-mission_